Alternative Markets Update H2 2019

Hedge Funds
The industry had its best year since 2013 and the average hedge fund is up more than 9%. Especially the results, which were achieved in H1, are extraordinary. H2 was more volatile, in which equity strategies did very well, while e.g. macro and cryptocurrency strategies lost compared to their results of H1 2019. When considering the economic and political environment, these results are even better, as 2019 faced many uncertainties. Noteworthy are the debate about Brexit all year, the trade war between the US and China, the attack on an oil facility in Saudi Arabia as well as the recent assassination of Iranian general Soleimani, which may have further consequences. Nevertheless, our cryptocurrency strategy remains the

most profitable strategy this year with a YTD of 82%, followed by several equity strategies and our global macro strategy. Figure 1 shows the performance of our strategies compared to several benchmarks, whereas Figure 2 shows the returns sorted by hedge fund strategy.

Figure 1: Overview of Performance of Different Hedge Fund Strategies: December 2019, Source: Stone Mountain Capital Research

Figure 2: Overview of Performance of Different Hedge Fund Strategies: January 2020, Source: Eurekahedge

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RESEARCH PERSPECTIVE VOL.124 January 2020 Download Research Perspective Alternative Markets Update H2 2019 Hedge Funds The industry had its best year since 2013 and the average hedge fund is up more than 9%. Especially the results, which were achieved in H1, are extraordinary. H2 was more volatile, in which equity strategies did very well, while e.g. macro and cryptocurrency strategies lost compared to their results of H1 2019. When considering the economic and political environment, these results are even better, as 2019 faced many uncertainties. Noteworthy are the debate about Brexit all year, the trade war between the US and China, the attack on an oil facility in Saudi Arabia as well as the recent assassination of Iranian general Soleimani, which may have further consequences. Nevertheless, our cryptocurrency strategy remains the most profitable strategy this year with a YTD of 82%, followed by several equity strategies and our global macro strategy. Figure 1 shows the performance of our strategies compared to several benchmarks, whereas Figure 2 shows the returns sorted by hedge fund strategy. Equity YTD 2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Equity Strategy Index 17.17% 11.51% 14.16% 0.64 0.23 Credit Suisse L/S Equity Index 12.17% 8.61% 8.80% 0.75 -0.06 HFRX Equity Hedge Index 10.72% 4.98% 7.71% 0.39 -0.23 Eurekahedge UCITS Long Short Equity 6.22%* 3.56% 5.40% 0.29 0.40 S&P 500 26.39% 7.55% 14.30% 0.39 -0.08 Credit/ Fixed Income  YTD 2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Credit Strategy Index 5.78% 7.28% 4.07% 2.12 0.00 Credit Suisse Fixed Income Index 6.10% 5.07% 4.92% 0.62 -0.29 HFRX Credit/ Fixed Income Index 6.22% 5.18% 4.94% 0.64 -0.38 Eurekahedge UCITS Fixed Income 7.52%* 2.91% 3.35% 0.27 0.36 BofA ML US Corporate Master Index 11.42% 7.39% 6.25% 0.86 -0.16 Tactical Trading YTD 2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Tactical Trading Strategy Index 14.33% 22.51% 24.01% 1.05 0.28 Credit Suisse Global Macro Index 10.38% 9.47% 8.49% 0.88 -0.02 HFRX CTA Index 6.13% 3.58% 9.25% 0.17 -0.30 Eurekahedge UCITS CTA/Managed Futures 11.25%* 2.65% 7.96% 0.08 0.11 HFRX RV Volatility Index 14.23% 4.34% 4.89% 0.48 -0.33 CBOE Eurekahedge RV Volatility Index -1.24%* 7.51% 3.81% 1.44 2.74 HFR Cryptocurrency Index 27.67% 104.06% 92.02% 1.11 0.84 Fund of Hedge Fund YTD 2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC FoHF Strategy Index 9.52% 6.01% 6.73% 0.61 -0.20 HFRI FoHF Index 7.77% 6.38% 5.39% 0.81 -0.33 Eurekahedge UCITS Multi-Strategy 6.87%* 2.70% 3.70% 0.19 0.26 SMC Single Manager Cross-Asset Index 11.12% 12.64% 14.42% 1.36 0.12 SMC Cross-Asset Index 11.25% 13.17% 12.87% 1.42 0.15 Figure 1: Overview of Performance of Different Hedge Fund Strategies: December 2019, Source: Stone Mountain Capital Research Figure 2: Overview of Performance of Different Hedge Fund Strategies: January 2020, Source: Eurekahedge According to Eurekahedge, the hedge fund industry has an AUM of $2,272bn, being down $20bn compared to 2018, despite their average YTD 2019 of 9%. The approximation of the industry's AUM is substantially different when considering different sources. For example, Preqin estimates the AUM of hedge funds at $3.5tn, while HFR estimates an AUM of $3.25tn. However, their findings match, as the industry faces net outflows, which are reduced by the gains throughtout 2019. The redemption of capital from hedge funds made headlines over the whole year. The redemptions are likely caused by bad results in 2018 and the lost confidence as a consequence. Furthermore, the most successful strategies in 2019 were equity strategies and investment in equities have outperformed equity-based hedge fund strategies. Figure 3 gives insight into the distribution of returns sorted across hedge fund strategies for some strategies mentioned in Figure 2. The performances of hedge funds within a confidential interval of 90% lie between a gain of 22.56% and a loss 5.41%. Riskier strategies, such as equity, macro and managed futures, face deviations of more than 30%. However, this deviation is hugely favoring positive returns. Safer strategies mostly lie within an interval of 15%, while also favoring positive yields. Figure 3: Location Parameters of the Performances of Different Hedge Fund Strategies in 2019: December 2019, Source: Eurekahedge Figure 4 gives a more detailed insight into asset flows of hedge funds. The total assets managed by hedge funds remained stable over the year 2019. However, there were no months with net inflows but due to the performance of hedge funds and the referring growth have almost offset the net outflows throughout the year. Figure 4: Assets Flows of Hedge Funds from January 2013 to November 2019: December 2019, Source: Eurekahedge The ETF and ETP industry has reached a new record AUM of $6.35tn at the end of 2019. In December 2019, the second highest net inflows with $571bn were observed. Moreover, 2019 experienced the second highest YTD net inflows as well. In 2019, $571bn were invested in the ETF market, being $70bn lower than its previous record in 2017. Figure 5 shows the development of the AUM of the ETF and ETP industry. In line with the observation in the other asset classes, equity products contributed significantly more to this record AUM than fixed income products. The industry also outperformed its 10-year compound annual growth rate of 18.6% by a huge margin with a YTD 2019 of 31.9%.  Figure 5: Overview of the Market Capitalization of the ETF and ETP market: January 2020, Source: ETFGI Cryptocurrencies Bitcoin had a relatively quiet year compared to the previous years 2018 and 2017. From January to April 2019, Bitcoin barely saw any market movement at the 3,500$ mark. Afterwards, it started to raise to more than 13,000$ at the end of June 2019. After reaching this level, it steadily fell until the end of the year, where it remained at around 7,000$; thus, almost doubling its value in 2019. However, this gain is caused by a very low starting point in 2019, the lowest since the development of its highest peak in 2017 yet. As of January 14th 2020, Bitcoin is at 8,735$. The market capitalization moves according to the price of Bitcoin. At the peak in 2019, Bitcoin had a market capitalization of $244bn, whereas it is at $158bn on January 14th. Figure 6 shows the development of Bitcoin in the last two years. Ethereum had an even quieter year than Bitcoin, as Ethereum did not see any major peaks compared to the previous years. It started at a price of 134$ in January and closed at 131$ at the end of December 2019. At the end of June, where Bitcoin gained approximately 300%, Ethereum only gained slightly more than 100%. The market capitalization of Ethereum was $14bn in January 2019 as well as in December 2019. Figure 6: Development of Bitcoin from January 2018 to December 2019, Source: Coinmarketcap Private Equity The market capitalization of private equity diminished slightly in 2019 compared to 2018. In 2019, the market capitalization is $926bn, being $20bn lower than in 2018. However, as 2017 and 2018 were extraordinary years with an annual increase of $200bn, hence 2019 is still the second best year ever with a huge margin. Despite the lower market capitalization, the number of funds increased and is at an all-time high of 3,524 funds, as shown in figure 7. Figure 7: Market Capitalization of Private Equity from January 2011 to January 2020, Source: Preqin Fundraising in private equity market slightly decreased in 2019, despite remaining almost at the record height of 2017 and 2018 with slightly more than $600bn, compared to $650bn in 2017 and 2018. However, since 2017 the number of funds closed steadily decreases substantially. While in 2017 almost 2,500 funds were closed, this number decreased to 1,800 in 2018 and to 1,300 in 2019, as visible in Figure 8. This implies a consolidation in the market with fewer, but bigger funds. Figure 9 shows the allocation of the capital raised, funds respectively, to the strategy of the fund. The two most impactful strategies are buyouts and venture capital, as they account for more than 70%, both in capital raised and number of funds. However, 30% of funds target buyouts but the capital raised for this purpose exceeds 60%. For venture capital, it is the other way around, as they account for 40% of funds, but are only responible for about 10% of raised capital. Growth funds for example, have raised more money than venture capital, while only accounting for about 15% of funds. Figure 8: Fundraising in the Private Equity Market from 2000 to 2019, Source: Preqin Figure 9: Fundraising Sorted by Strategy: January 2020, Source: Private Equity International The dry powder of the private equity industry is on the rise since 2014 and won't slow down in 2019, as it reaches a new highest level with $1.45tn, which is similar to the estimation of the Private Equity Wire with $1.5tn. However, according to their survey, it is assumed that raising capital in 2020 will get more difficult. Figure 10: Dry Powder of the Private Equity Industry from 1999 to 2019: January 2020, Source: Preqin, CNBC Private Debt Figure 11 shows that fundraising started to decline in 2018 for the first time since 2014 and continues in 2019. At its peak, around $130bn were raised by private debt funds. In 2018, this fell to $120bn and in 2019 it remains at just a bit above $100bn. However, the most notable difference stems from the number of funds closed, as in 2018 more than 200 funds were closed, whereas in 2019, this number fell to just 150, a decrease of more than 25%. This implicates a strong trend of consolidation in the market. This development might be caused by the decrease of the yield in the public debt market, which is further encouraged by the interest rate policies of the major central banks around the world. Hence, investors tend to search for alternatives but the private debt market seems to also suffer from this development rather than profiting from it, as its yields diminish, especially when comparing them with the private equity or real estate market. Figure 11: Fundraising in Private Debt from 2000 to 2019: January 2020, Source: Preqin According to Figure 12, private debt funds raised $147bn in 2019, of which almost 40% flow into distressed debt and another almost 40% are allocated to senior debt. These strategies account for slightly more than 50% of private debt funds. Almost the whole remaining capital flows into mezzanine debt, whose funds are responsible for 35% of funds. Figure 12: Fundraising Sorted by Strategy: January 2020, Source: Private Debt Investor The aggregated capital by newly launched private debt funds achieved a record high of 192bn in 2019, being one billion above 2016's previous record. The number of funds is stable in relation to the newly raised capital; hence, there is no trend of consolidation and it implicates that the size of the funds remain stable. However, due to the decline in fundraising as a whole, it seems that newly launched funds are more attractive than older funds. Figure 13: Number of Funds Raised and Their Aggregated Capital in the Private Debt Market from 2011 to 2020: January 2020, Source: Preqin The available dry powder in the private debt market almost always rose since 2000, according to Figure 14. Yet the years, in which the dry powder declined, were only slightly below the previous years. 2018 was its highest value with almost $300bn of capital that is committed to private debt. In 2019, it fell substantially to around $260bn. Even though the decline is quite significant, 2019 is still the second best year. Hence, the industry may not be that endangered, as the fundraising above suggests. Figure 14: Dry Power in the Private Debt Market from 2000 to 2019: January 2020, Source: Preqin Real Estate Fundraising in the real estate market is continuously getting more interest, due to the declined return in other asset classes, such as bonds, or the uncertainty caused by geopolitical environment. 2018 was a very successful year, as $252bn were raised compared to $192bn in 2017, while reaching the highest level in the decade. 2019 managed to surpass the capital raised in 2018 with $281bn. Due to the increased interest in real estate, many more funds are raising capital compared to the previous years, as shown in Figure 15. Hence, newly launched real estate funds are on the rise, as shown in Figure 16, and setting a new record in fundraising. For the first time since the financial crisis in 2008, more capital was raised with $150bn. Thus, new funds account for more than half of the fundraising in 2019. Despite the record number of funds, which seek investments, the number of newly launched funds dropped from 130 in 2018 to 80 in 2019. Figure 15: Fundraising in the Real Estate Market from 2010 to 2020: January 2020, Source: Preqin Figure 16: Aggregate Capital Raised by Newly Launched Funds in the Real Estate Market from 2000 to 2019: January 2020, Source: Preqin The dry powder in the real estate industry closed slightly below the record value of $325bn in 2018. Hence, the steep rise starting in 2016 ended in 2019. However, the committed capital to real estate remains at a very high level, as observable in figure 17. Figure 17: Dry Power in the Real Estate Market from 2000 to 2019: January 2020, Source: Preqin Macro Figure 18 shows a landscape of possible risks in 2020. The different risks are sorted by their impact and the likelihood of occuring. The major risks to look out for in 2020 are environmental issues, consisting of extreme weather, as it is currently observable in Australia with their fires, climate action failure, natural disasters, biodiversity loss as well as human-made environmental disasters.  These are all environmental issues in the survey and at the same times these are most likely risks going forward in 2020. These issues also have a high impact. The second type of risks to watch out for are technological issues, of which mostly are data fraud and theft as well as cyberattacks are concerning. Cyberattacks are considered as dangerous, due to their possible impact on the world economy. Geopolitical risks can have high impacts but are not as likely as other scenarios. Examples for these risks are the usage of weapons of mass destruction or global governance failures. Societal and economic risks are mostly below the average regarding the likelihood of occuring and their impact. Figure 18: Global Risk Forecast 2020: January 2020, Source: Oliver Wyman & World Economic Forum STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). 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